quiz1 - A 3 10(c $2,700(d $3,000 3 Suppose that you can...

Econ 134aSummer 2007Quiz 1Name:1. Consider a payment of $1 million in ten years. If the interest rate declines from 10%to 8%, what happens to the present value of that payment?(a)Increases - By the present value equation, as r increases, the denomi-nator increases and PV decreases.(b) Decreases(c) No change, since the payment has not changed(d) Not enough information2. Given a discount rate of 10%, calculate the (approximate) present value of an annuitywhich pays $1,000 per year for 3 years, with the first payment due in exactly 1 year.(a) $2,250(b)$2,500 - Use the annuity formula to solve

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Unformatted text preview: A 3 . 10 (c) $2,700 (d) $3,000 3. Suppose that you can borrow and lend at 5%. You plan to spend $35,000 this year, and your employer is oﬀering to restructure your salary to best ﬁt your needs. Which of the following options should you take? (a) $35,000 this year and $85,000 next year (b) $50,000 this year and $70,000 next year (c) $100,000 this year and $20,000 next year - Highest PV (d) Doesn’t matter, since you can borrow and lend at the same rate Helpful formulae: • Net Present Value = C + ∑ T t =1 C t (1+ r ) t • Annuity: PV = C r ‡ 1-1 (1+ r ) t ·...
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